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Tuesday, October 23, 2018

Credit crunch – the bad and the not so bad news

At the INTERTANKO/INTERCARGO U.K. members’ lunchtime meeting held this week in the London office, Peter Illingworth, General Manager, DVB Bank AG's London Branch / Global Head Crude Oil & LNG Tanker Group (CLG), gave a presentation on the credit crunch and its impact on the shipping market.


Illingworth provided a comprehensive overview of the factors that have led to the recent credit crunch by elaborating on the actual magnitude and nature of the U.S. sub-prime mortgage market, where 12% can be considered as sub-prime and 10% as Alt-A, totalling about USD 2.2 trillion.


The past two years of dramatic decline in housing prices and rising sub-prime delinquency rates have caused financial turmoil and, in the worst case, a projected USD 1.3 trillion in write-downs. As pointed out by the audience, a rather worrying percentage (up to 10-15%) of U.S. Gross Domestic Product (GDP) will supposedly be needed to cover it.


Illingworth said that whilst the U.S. mortgage market appears to be remote enough from shipping activities, still no less than nine of the top 20 banks providing shipping loans have been directly affected by the sub-prime issue.


Furthermore, he showed how there has been a drop in syndicated shipping loans (both in volume and number of transactions) since the peak in 2007, and that there is a clear change in the lender’s objectives, now i.a. requiring low gearing and rapid repayments. The “lender's market” situation was illustrated by an example of the financing costs associated with the resale of a 20-year-old tanker ultimately requiring time-charter rates at the upper end of 20-year averages in order to achieve a reasonable Internal Rate of Return.


Referring to the future orderbook, Illingworth anticipates that the required finance for ships can still be secured although for the next few years probably not at the expected leverage, although some of today’s assumed contracts may not materialise into actual deliveries.


A copy of the presentation can be downloaded by clicking here.


Contact: Chantal Cheung Tam He / Rob Lomas